Strategic Financial Analysis

Read the following scenario, then draft a 3–4 page business  memorandum to Linda Hoff, Stanford's CFO. In your memo, codify your  findings and interpretations from the horizontal and vertical analyses  and the level of alignment in the company's fiscal management and its  strategic direction. Include an Excel spreadsheet as an attachment to  the memo. In this memo you will:

1. Review the year-over-year variances contained in the audited  Stanford balance sheets and income statements for fiscal years 2015–18  in the Week 5 Assignment Spreadsheet [XLSX].  You'll be expected to pay particular attention to the negative  variances (color coded in red) that you believe to be potentially the  most impactful to Stanford.


2. Speculate as to the reasons for the negative variances.


3. Examine the common size balance sheets and income statements  looking for abnormally low or high ratios based on what you know about  the line item and what you observe in the data for the other fiscal  years.


4. Look for patterns in the line items over the three-year period and  identify any unusual findings that may need to be examined further.


5. Assess the alignment of the organization's fiscal management to  the strategic direction of the firm. Fiscal management is based on your  horizontal and vertical analyses. The strategic direction is based on  the vision, mission, and strategic priorities of Stanford.

Purpose

The purpose of this assignment is to familiarize you with financial  statements, the need to align the financials and the strategic direction  of the firm, and the process of performing horizontal and vertical  analyses of a company's balance sheets and income statements.

Scenario

You're a health care administration fellow at the prestigious  Stanford Healthcare. You have been rotating through the various  departments over the past nine months and now you have the honor of  working under the mentorship of Chief Financial Officer Linda Hoff.

Stanford Medicine includes Stanford Healthcare, Stanford Children's  Hospital, and Lucile Packard Children's Hospital Stanford. This  organization uses an integrated approach to strategic planning, which  incorporates jointly agreed upon strategic priorities from its various  entities. It also ensures a high degree of congruence in strategic focus  by each entity. Before outlining the strategic priorities for Stanford  Medicine, it is important to note that a firm's directional strategy  comprises three discrete yet interwoven components: vision, mission, and  goals (or, in this case, priorities). Armed with this knowledge, you  have familiarized yourself with the vision, mission, and priorities of  Stanford Medicine. Below is what you found. When examining a company's  financials, it is prudent to keep the directional strategy of the  company in mind. After all, in order to advance many strategic  priorities, which include fulfilling the mission and positioning the  organization to achieve its vision for the future, proper management of  the firm's scarce resources is vital. Failure to properly manage the  financial performance of the organization can compromise the company's  ability to maintain a competitive advantage in the marketplace.

Our Vision

Precision Health: Predict. Prevent. Cure. Precisely.

We will heal humanity through science and compassion by leading the biomedical revolution in precision health.

Our Mission

Improving Human Health Through Discovery and Care.

Through innovative discovery and the translation of new knowledge,  Stanford Medicine improves human health locally and globally. We serve  our community by providing outstanding and compassionate care. We  inspire and prepare the future leaders of science and medicine.

Strategic Priorities

A collaborative endeavor involving the entire community, the  Stanford Medicine integrated strategic planning process yielded a  framework that is human centered and discovery led, focused on three  overarching priorities for our enterprise.

By enhancing our strengths and achieving our goals in these priority  areas, we will amplify our preeminence and remain uniquely positioned  to lead the biomedical revolution in precision health, ensuring our  continued ability to guide health care through significant global  changes.

Value Focused

• Provide a highly personalized patient experience.


• Ensure a seamless Stanford Medicine experience.

Digitally Driven

• Amplify the impact of Stanford innovation globally.


• Deliver human-centered, high-tech, high-touch care and revolutionize biomedical discovery.


• Lead in population health and data science.

Uniquely Stanford

• Accelerate discovery in and knowledge of human biology.


• Discovered here, used everywhere: advance fundamental human knowledge, translational medicine, and global health.


• Ensure preeminence across all of our mission areas.

Variance Analyses

Normally, managers are expected to examine positive and negative  variances, and then speculate as to possible explanations for the  observed variances. Following this initial assessment, managers would be  expected to dig deeper into those variances of greatest concern to the  organization to uncover the actual causes for the variances, and then  implement necessary corrective actions. Digging into all variances  would be costly and, quite frankly, a misuse of time and energy. The  CFO has asked you to conduct a variance analysis of the company's  consolidated balance sheets and income statements for fiscal years 2015,  2016, 2017, and 2018, which you began. You have determined the  variances for each account (line item) captured in the financials. Now  that this first step has been accomplished, the CFO would like you to  pay particular attention to the negative variances contained in the  spreadsheet and focus on those variances you believe to be potentially the most impactful to Stanford.

Once you've completed your variance analysis over time, which is referred to as a horizontal analysis,  you are ready to create a common size balance sheet and income  statement of each of the four fiscal years (2015–18). You prepared the  common sized financials, which are captured in your spreadsheet. Now it  is time to perform vertical and horizontal analyses of these common size  financials. The common size balance sheet allows you to see each asset  relative to total assets as well as each liability and net asset (in the  case of nonprofit organizations) relative to total liabilities and net  assets. In a common size income statement, each line item is expressed  as a percentage of total revenue or sales. Common sizing balance sheets  and income statements allows firms to compare against one another even  though they may be of different sizes. It also allows a firm to  benchmark its financial performance against comparative groups. In this  case, there isn't any comparative data to benchmark against; however,  you can examine the ratios in each fiscal year and look to see if  anything looks abnormally low or high based on what you know about the  line item and what you observe in the data for the other fiscal years  (vertical analysis). You can also look for patterns in the line items  over the four fiscal years and point out any unusual findings that may  need to be examined further (horizontal analysis). In finance, sometimes  the organization establishes interim goals and targets for certain line  items in the financials. The firm can compare its actual performance  against the established goals and targets.

Financial Management and Strategic Direction

Once you've completed your horizontal and vertical analyses of the  financial statements, you should be able to get a sense of how well  management has managed the financial resources of the company in support  of its strategic direction. In business, the strategic direction should  be evident in its vision and mission statements and strategic  priorities. The strategic priorities should support the company's  mission, and the mission should help advance the firm's vision for the  future. Failure to effectively manage the company's financial resources  can seriously compromise the firm's ability to fulfill its mission and  subsequently the vision.

Business Memorandum to CFO

Using the analysis that you performed on Stanford Healthcare and  trends that you identified, write a business memorandum to the CFO. In  your memo, codify your findings and interpretations, and assess the  alignment of the organization's fiscal management to the firm's  strategic direction. Attach to the memo your analysis in an Excel  spreadsheet. Your analysis and trends identified should take into  account any feedback that you received from your professor and/or peers.

Helpful hints: Negative variance is not always a  bad thing. For example, you might see a slight increase in the operating  costs; however, if you achieved a positive variance in the total  operating revenue that outpaced the increase in operating costs, that  may be perceived as a positive outcome. Remember, you need to spend  money to make money. We just want to make certain that operating  expenses don't outpace the growth in operating revenues. Also, keep in  mind that some variances are useful in explaining other variances even  if these variances are associated with different financial statements.  For example, you may see an increase in operating costs, which is a  negative variance, but an increase in current assets, which is a  positive variance. Furthermore, you should look for patterns over time.  This can reveal both positive and negative trends that may provide  insight into the variances you discovered. For example, you may have  noticed that a certain expense has continued growth over the past 3  years (negative variance); however, the rate of growth year-over-year  has been declining. It could be that Stanford has implemented some  cost-cutting measures that are showing signs of working.

This course requires the use of Strayer Writing Standards. For  assistance and information, please refer to the Strayer Writing  Standards link in the left-hand menu of your course. Check with your  professor for any additional instructions.

The specific learning outcome associated with this assignment is:

• Audit financial statements and expenditures for alignment with organizational strategic priorities.